The Cromer Terrace blog - for independent graduate perspectives on Current Affairs, Cultural Issues and The Arts

Thursday, 12 July 2012

Balancing Act: The future of British Banking

There have been so many scandals over the last few years
that it is difficult to remember which came first: Politician’s expenses, then
phone hacking, then LIBOR? Or does the new LIBOR scandal technically come
first, since British banks have been found guilty of manipulating a key
financial rate since back in the noughties? (Pun intended.) Just when Bob
Diamond’s statement that the ‘period of shame for British banking needed to be
ended’ couldn’t get any more infamous, it emerged that the banks had been guilty
of pushing unnecessary financial products onto small business (who then went
bankrupt), and now this. The British public have a right to be outraged; anyone
observing from outside the country may be forgiven for thinking that this
island, normally a bastion of law and order and ‘gentlemanly capitalism’ has
suffered a severe case of moral decay. The debate has significant moral
implications but is imposing regulation on the banks the right thing to do?

To backtrack slightly, LIBOR (London interbank offered rate)
is essentially the rate that determines how much it costs banks to borrow money
from the markets, and it underpins a market worth £350trillion. Since it is
made of estimates from eighteen banks in London, it can technically be fiddled,
although the system discounts the highest and lowest figures and takes an
average of the rest. The scandal itself can then be separated into two parts.
Firstly, during the boom years, Barclays (and possibly twenty other banks being
investigated internationally), manipulated the rate by working with one another
to drive it up when it was good for business. Secondly, after the crash,
Barclays was found to be deliberately estimating a lower rate in order to make
their business look stronger. This distinction is important to make: During the
first period the manipulation was done to maximise profit, and could therefore
be “the biggest securities fraud in history” (The Economist). However the second period is more morally
complicated.

Since the crash, every person in the UK has forked out
£19,000 to support the banks. The prosperity of them is, to some extent, in our
self-interest. Barclays in this case massaged the rate to make the bank appear
stronger and therefore save the taxpayer. And thus we come to the role of the Bank
of England and the politicians. An on-going evolution of the scandal has
occurred since Bob Diamond claimed that he had the tacit consent of the Bank of
England and regulators to manipulate the rate. In the aftermath of the
financial crash of course, politicians were desperate to keep credit flowing
and the industry afloat.

The government seems caught between a rock and a hard place:
On the one hand, if they choose to enact a ‘witch hunt’ against the bankers and
bring in constricting regulation, Britain could lose its most dynamic industry,
the only industry in which Britain is truly a world leader. Competition from
Hong Kong, Mumbai and Dubai should be taken seriously. On the other hand if they let them get away
with it, the public will be outraged, and more than ever the government and the
banking elite will be seen as sleeping in the same bed. This is especially so
after the Bureau of Investigative Journalism this month revealed that the City
has spent £92million on political lobbying alone in 2011. This has led to such
policy successes as the slashing of UK corporation tax and taxes on banks'
overseas subsidiaries, and neutering of a national not-for-profit pension
scheme launching in October that was supposed to benefit millions of low-paid
and temporary workers. (The Guardian)

Moreover, the government’s future
policy will also be framed against the 2011 riots, an occurrence that has
largely been swept under the carpet in the year since. Exemplary of the
heavy-handed response was the sentencing of a student with no previous
convictions to six months in prison, for the theft of a £3.50 bottle of drink.
(The Week.) Any non-action against
bankers will be juxtaposed against such extreme measures against the less well
off. Indeed, a strong argument can made to link the financial crisis, caused by
irresponsible banks, with the frustration and disenfranchisement felt by many
poorer young people that spilled over last summer. An even broader suggestion would be that Britain’s
financial sector has been the driving force behind the long-term stratification
of this country.

The banker’s argument, that
Britain is dependent on the industry’s prosperity, is to some extent true. But
would the industry really suffer such a blow if regulation was brought in? The Observer has remarked that endemic
corruption will only end when bankers know they are likely to get caught and
face stiff penalties – mere condemnation and calls for a change in culture won’t
cut it. Across the pond, American law firms are lining up to represent clients
from multinationals to Baltimore City council, who say they have lost money as
a result of banking manipulation. Here, the Financial Services Authority (FSA),
the watchdog accused of turning a blind eye to LIBOR fixing, has disingenuously
stated that no one has any lost money.

Bagehot in The Economist has reasoned against a public enquiry: “Public anger which vents itself on individuals and moves swiftly on does nothing to make the system work better; and, if the pendulum swings too far, it may endanger the country in the long run.” Nevertheless, something substantial needs to be done. Whether it is through a judicial inquiry or parliamentary investigation, there needs to be a significant overhaul of the structure of British banking. They are essential to our prosperity, yet act increasingly antisocially. Most of all it is for British morality and justice that our financial sector needs to be reformed.

Just as the press is being held to account for its actions, and regulation reformed, so too the financial sector needs to face serious penalties: Without more regulation there is simply too big an incentive to cheat and manipulate, and there is no reason to suggest that a more responsible and regulated sector could not still compete globally. I for one am glad that these scandals keep occurring, for they seem to be the most effective way to muster public support in favour of change.